Mandatory HR disclosures in the context of ESG reporting
In recent years, the term sustainability has also gained ground in the business world. Businesses often associate it with "going green" and focus on the environmental aspect of sustainability. However, sustainability also includes, in addition to environmental issues, the social or societal and governance aspects, which are no less important.
Sustainable business development will not be possible without people and employees.
For now, the concept of sustainability is mainly ensures the transparency of reliable, comparable and relevant information on sustainability risks, opportunities and impacts2 and establishes a tool to enable companies to respond appropriately to a voluntary decision by companies to integrate social and environmental concerns into their management. As sustainability and corporate responsibility become increasingly important to investors, stakeholders, banks, credit institutions, consumers and employees, sustainability is becoming an increasingly important factor in corporate governance. This is further enhanced by the European Union’s commitment to the goal of an economy that works for people and provides stability, jobs, growth, and sustainable investment.1 The adoption of the new Sustainability Reporting Directive broadens the scope of companies that will be obliged to report on their sustainability impacts. However, due to supply chains and the need to work more closely with obliged parties, disclosure of companies that are not otherwise covered by the new Directive.
Companies will have to disclose how many “workers” at large with whom they do not have an employment contract are in a relationship with them and what work they do.
The Directive increases the importance of sustainability reporting and brings it closer to financial reporting standards. By making reporting mandatory and setting common reporting standards at the European Union level, it sustainable risks and opportunities, and improve its business performance, access to financial capital, and reputation. Now is the time for companies to put in place mechanisms to improve the areas they will report on in the coming years, thereby ensuring greater competitiveness and better business results.
It is important that companies see ESG reporting not just as an administrative burden, but as a useful tool that will enable them to develop sustainably for a better future.
This paper briefly explains the key aspects of the new Directive and the draft mandatory reporting standards, focusing on the social aspect of sustainability, in particular the mandatory HR disclosures, as this is an area where the role of HRM professionals in companies will be enhanced (both in collecting data and in setting targets and measures to improve results).
ESG reporting3
The Corporate Sustainability Reporting Directive4(also known as CSRD) entered into force on 5 January 2023, and Member States will have to implement it within 18 months of its entry into force. The adoption and implementation of this Directive will increase transparency on sustainability impacts, improving information for owners, investors, lenders, insurers, business partners, trade unions, workers’ representatives, consumers, NGOs, civil society and others.
Collecting and disclosing data on discrimination, equal opportunities and diversity will enable companies to identify risks and set targets to reduce them.
Directive on corporate sustainability reporting or “CSR”. The so-called “ESG reporting” builds on the commitments made in the Non- Financial Reporting Directive5 (also called the NFRD). The new Directive increases the range of obliged parties and imposes more detailed reporting requirements. Under the NFRD, approximately 11,700 companies in the EU were subject to reporting obligations, while under the CSRD more than 50,000 companies in the EU will be subject to reporting obligations.6
Reporting obligors7
1. Large companies with more than 500 employees already required to report under the NFRD, from 1 January 2024 for reports in 2025;
2. Large EU companies that meet two of the three criteria below:
• More than 250 employees on average in a financial year;
• More than €40 million in net revenues;
• More than €20 million in capital;8
from 1 January 2025 for reports in 2026.
3. All listed companies in the EU, including small9 and medium-sized10 companies (except micro-enterprises11), by 1 January 2016 for reports in 2027, with medium and small companies having the option to an “opt-out”, which will allow them to be exempted from use until 2028;
4. Third-country (non-EU) companies with a net turnover of more than €150 million in the EU and a subsidiary or branch in the EU, from 1 January 2028 for reports in 2029.
The Directive foresees the adoption of mandatory sustainability reporting standards (ESRS), which will be prepared by the European Financial Reporting Advisory Group (EFRAG). This will ensure uniformity to allow comparability of data between companies and between Member States. To ensure the reliability and accuracy of the data, the information and the report will have to be certified by a certified independent auditor, and, to ensure access to the information, it will have to be published as part of companies’ business reports and disclosed in digital form.9
EFRAG has adopted a draft of 12 mandatory standards,13 of which are expected to be endorsed by the European Commission by 30 June 2023. The draft mandatory reporting standards provide for reporting on governance (which includes management processes, controls and procedures, and the management of impacts, risks, and opportunities), strategies (which includes the interaction of the entity’s strategy and business model with their significant impacts, risks, and opportunities, including the risk management strategy.), the management of impacts, risks, and opportunities14 (which includes the processes by which an enterprise identifies, assesses and manages impacts, risks, and opportunities through policies and behaviors and action plans), and the matrices and targets that enable the measurement of an enterprise’s performance, including progress towards its objectives.
As investors, companies and stakeholders around the world pay more and more attention to ESG, there is a shift towards greener and more sustainable values within the sector.
Among the sustainability topics currently included in the reporting standards are environmental standards (the so-called Standard E), (within the environmental standard: climate change, pollution, water and water resources, biodiversity, circular economy.), social standards (i.e.Standard S)15 and governance (Standard G), (within governance: business conduct, including corporate culture, whistleblower protection, animal protection, supplier relations, including payment practices, corruption and under-buying).
Mandatory disclosures in the field of labour and human resources
The social standards (known as Standard S) in the field of human resources cover working conditions (working hours, adequate pay, occupational safety and health), social dialogue, workers’ participation and trade union organisation, equality of treatment equal pay for work of equal value, employment and inclusion of people with disabilities, measures to prevent violence and harassment in the workplace, and diversity. Other topics to report on include child labour, forced labour, adequate housing and privacy.
Now is the time for companies to put in place mechanisms to improve the areas they will report on in the coming years, thereby ensuring greater competitiveness and better business results.
Reporting under ESA S1 is linked to the so- called own-account workforce, which includes not only employees under an employment contract, but also so-called non-employees, including self-employed workers, posted workers, persons performing student work and others performing work in the enterprise.16 Companies will have to disclose how many “workers” at large with whom they do not have an employment contract are in a relationship with them and what kind of work they do.17
Mandatory standards in the context of the own workforce provide for reporting on processes for engaging with workers and workers’ representatives on significant impacts on workers, and on procedures for addressing negative impacts and procedures for dealing with workers’ complaints.18
Companies will be required to disclose the procedures in place and the measures taken with respect to significant impacts on workers and to mitigate significant risks and realise opportunities, including the effectiveness of these measures.
Only by taking a holistic approach to improving employee well-being can we provide an optimal environment and ensure that our employees are happy and successful in their work.
Mandatory disclosure of the number of all employees in an enterprise is foreseen, as well as disaggregated reporting by gender and by country in which the enterprise has 50 or more employees: the number of permanent employees, the number of fixed-term employees, the number of full-time employees and the number of part- time employees19 (and additionally the number of employees who are not guaranteed working hours (“non-guaranteed working hours”).-guaranteed hours employees”), which does not exist in the Slovenian legal order.) companies must also disclose the percentage of disabled people in their workforce.20
Companies will also have to report on the internal policies they have in place to prevent discrimination and harassment in the workplace, promote equal opportunities and other ways to increase diversity and inclusion. Specifically, companies will be able to disclose whether internal acts include a prohibition on discrimination on the basis of personal circumstances (whereby the ESRB’s definition of personal circumstances includes the following circumstances: race, colour, sex, sexual orientation, gender identity, disability, age, religion, political opinion, national or social origin, or any other form of dis- crimination covered by EU or national law) and which personal circumstances are covered by the prohibition.21 Businesses will also be required to report on the measures they take to ensure inclusiveness, on affirmative action for vulnerable groups and on the procedures they have in place to prevent discrimination and reduce its negative consequences. Among other things, ESRS S1 foresees the reporting of perceived cases of discrimination, including harassment, during the reporting period and the total amount of penalties, fines, compensation for damages for social and human rights violations during the reporting period22
ESG criteria are based on environmental sustainability, social and corporate responsibility, which can be used to assess the negative impacts caused by a company.
As part of reporting on diversity indicators, companies will be required to disclose the gender breakdown of top management positions among employees and the distribution of employees by age group.23
In the context of reconciling work and family life, companies will have to disclose information on the entitlement to and actual use of family-related leave (maternity, paternity, parental leave, leave to care for a family member)24 and disaggregate the data by gender.25
Mandatory disclosures also include the percentage of the gender pay gap.26 Reporting on the highest remuneration in the company is also envisaged, namely disclosure of the ratio of the total annual remuneration of the highest paid employee in the company to the average of the annual remuneration of the other employees (all except the highest paid employee)27 (taking into account as remuneration, in addition to remuneration for work, di- vidends, options and all other remuneration).28
As can be seen from the above mandatory disclosures, a strong emphasis in HR reporting is on equal treatment, non-discrimination and equal opportunities. I am involved in anti-discrimination law and I have found that companies in Slovenia do not discriminate against employees directly29 or intentionally. In practice, it is often the case that companies adopt seemingly neutral measures which, however, disadvantage certain individuals because of their personal circumstances. This is the case, for example, of performance-related pay arrangements that disadvantage those who are absent from work because of parenthood or illness.30 The wage gap in companies often occurs not because women workers are paid less than men, but because they are more likely to take legitimate leave from work due to parenthood, childcare, or to take up the right to work part-time due to parenthood,31 which affects not only hourly wages but also future income and pensions. The collection and disclosure of data relating to discrimination, equal opportunities and diversity will enable companies to identify risks and set targets to reduce them. This is also the purpose of the new directive and the mandatory standards, which, under three pillars: environmental, social and governance, set out the specific data that companies will have to disclose and on which they will have to base new strategies and practices to achieve their objectives. It is important that companies do not see the new regulation as a mere administrative burden, but as a useful tool that will enable them to develop sustainably for a better future for the planet and for business.
Literature and sources
1 Preamble to Directive (EU) 2022/2464 of the European Parliament and of the Council of 14.12.2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU as regards corporate sustainability reporting.
2 Council conclusions on deepening of the Capital Markets Union of 5. 12.12.2019, available at: https://data.consilium.europa.eu/ doc/document/ST- 14815-2019-INIT/en/pdf (accessed on 27.12.2022 at 12:03).
3 E – environment, S – social, G – governance.
4 Directive (EU) 2022/2464 of the European Parliament and of the Council of 14/12/2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU as regards corporate sustainability reporting.
5 Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information on certain large undertakings and groups.
6 https://www.europarl.europa.eu/news/en/press–room/20221107IPR49611/sustainable-economy-parli- ament-adopts-new-reporting- rules-for-multinationals.
7 Press release of the Council of the EU of 21.6.2022, available at: https://www.consilium.europa.eu/en/press/press-releases/2022/06/21/new-rules-on-sustainability- di- sclosure-provisional- agreement-between- council-and-european-parliament/.
8 Article 3(4) of Directive 2013/34/EU.
9 Small undertakings are undertakings which do not exceed at least two of the following criteria: 50 employees averaged over the financial year; EUR 8,000,000 net revenue; EUR 4,000,000 capital (Article 3(2) of Directive 2013/34/EU).
10 Medium-sized enterprises are enterprises that are neither micro nor small and do not exceed at least two of the following criteria: 250 employees on average during the financial year;<style=”text-align: justify;”>40,000,000 net revenue;EUR 20,000,000 capita- la Article 3(3) of Directive 2013/34/EU).
11 Micro-enterprises are enterprises that do not exceed at least two of the following criteria: an average of 10 employees during the financial year; a net turnover of EUR 700,000; a capital of EUR 350,000 (Article 3(1) of Directive 2013/34/EU).
12 To ensure access under the Capital Markets Union 2020 Action Plan: https://finance.ec.europa. eu/capital-markets-union- and-financial- markets/capital-markets-union/capital-markets-union-2020-action-plan_en (28.12.2022).
13 Available at: https://efrag.org/news/public-387/EFRAG-delivers-the-first-set-of-draft- ESRS-to-the-European-Commission (28.12.2022).
14 Within the social standard: own labour force (ESRS S1), workers in the value chain (ESRS S2), affected communities (ESRS S3), consumers and end-users (ESRS S4).
15 Paragraph 4 of S1 of the draft ESRB and Annex B of S1 of the draft ESRB.
16 Disclosure requirement S1-7 of the draft ESRB.
17 Disclosure Requirement S1-2 of the draft ESRB
18 Annex B S1 of the draft ESRB.
19 Disclosure requirement S1-12 of the draft ESRB.
20 Disclosure requirement S1-1 of the draft ESRB.
21 Annex B S1 of the draft ESRB.
22 Disclosure requirement S1-15 of the draft ESRB
23 Disclosure requirement S1-9 of the draft ESRB.
24 Annex B S1 of the draft ESRB.
25 Disclosure request S1-15 of the draft ESRB.
26 Disclosure Requirement S1-16 of the draft ESRB and Appendix B S1 of the draft ESRB.
27 Disclosure Requirement S1-16 of the draft ESRB and Appendix B S1 of the draft ESRB.
28 Annex A S1 of the draft ESRB.
29 Article 6 Protection against Discrimination Act (Official Gazette of the RS, No. 33/16 as amended)
30 See also the decisions of the Equality Ombudsman: Decision 0700-17/2021/12 of 6.10.2021; Decision 0700- 4/2021/8 of 7.9.2021; Decision 0700-14/2021/10 of 7.9.2021; Decision 0700-19/2021/7 of 30.7.2021; Decision 0700- 14/2020/7 of 22.2.2021; Decision 0700-12/2020/14 of 5.10.2020; Decision No 0700-30/2019/15 of 4. 9. 2019.
31 The data are available in a news item on the Government’s website dated 25.11.2022: https://www.gov.si/novice/2022-11-25-unanimously-adopted-amendment-to-the-starsev-law
-security-and-employee-benefits/
